How Do Offshore Companies Choose Banking Services in the Face of CRS and KYC?

“The Era of Global Taxation Is Coming”

In 2018, several domestic media outlets ran the headline, “The era of global taxation is coming”, with regards to the implementation of the Common Reporting Standard (CRS). For many high net-worth individuals, CRS was a major buzz word in 2018. So, what is CRS exactly?

CRS is short for Common Reporting Standard. CRS is a standard for taxpaying citizens’ information exchange between different countries, developed by the Organization for Economic Co-operation and Development (OECD), requiring global financial institutions to offer the account information of citizens of a country to the tax authority of that country in accordance with CRS requirements. For example, if a Chinese citizen opens a bank account in Cyprus, the authorities of Cyprus are obligated to notify Chinese authorities of it, and vice versa.

As early as 2017, Hong Kong made an announcement regarding the implementation of CRS. On March 16, 2017, the Legislative Council of the Hong Kong Special Administrative Region announced the decision that it would officially implement CRS in 2017 and notify over 140 countries of all Hong Kong enterprises and tax residents’ account information at the beginning of 2018. With the implementation of CRS in China in 2018, it officially entered the “era of global taxation”.

II The Impact of Banking Policies on the Number of Incorporated Offshore Companies

What is the impact of the implementation of CRS in 2018 on the incorporation of offshore companies and offshore bank account opening?

As a Hong Kong-based licensed secretarial company and an overseas company service provider (Hangtung Holding Group Limited, Hong Kong Trust and Company Service Provider Licensee Number: TC006080), we have seen statistics showing that the number of Hong Kong companies which cancelled their applications in 2018 has increased. The number of offshore companies registering has maintained steady growth. (The official Companies Registry data shows that up to the end of 2018, the total number of local companies incorporated according to the Companies Ordinance in Hong Kong was 1,400,950, which is 17,004 more than in 2017). However, taking into account that some offshore company operators are afraid of the impact of the implementation of CRS, and that some banks have tightened their KYC policies (KYC being short for Know Your Customer, the institutional foundation for anti-money laundering and corruption prevention), the market demand for the establishment and sustained operation of offshore companies will decline.

According to the annual statistical analysis of company registration data in mainstream offshore jurisdictions like the British Virgin Islands, Cayman Islands, Marshall Islands, Bermuda Islands, Seychelles Islands, and Samoan Islands, the change and adjustment of policies on bank account opening have had an impact on the number of offshore company registrations. For some offshore company operators, whether it is possible to open a bank account has a direct impact on the normal running and continuing operation of their business. Therefore, whether it is possible to open a bank account is one of the elements that they have to take into account when considering incorporating an offshore company in a relevant jurisdiction.

III Banks’ Policies towards Offshore Companies’ KYC Policies

Based on their business requirements, offshore companies mainly have two options for opening accounts: one is to open a so-called offshore account at home, and the other is to directly open an account abroad. For customers from mainland China, the first option is to open an OSA account (Offshore Account), an NRA account (Non-resident Account) or an FTN account (Free Trade Non-resident Account) in China. The second option is to directly open bank accounts in Hong Kong, Singapore, or via a professional organization in the Cayman Islands or the Seychelles. Comparatively speaking, Hong Kong features an advantageous geographical location as well as more convenient communication, so opening a bank account for an offshore company in Hong Kong may be attractive to customers from mainland China.

Based on CRS policy requirements for banks, along with the regulatory requirements of different international organizations (such as the Financial Action Task Force on Money Laundering) and governmental agencies of different countries and regions, banks impose more requirements on KYC auditing and the subsequent supervision of offshore companies’ account-opening applications. These include identifying customers’ identity (including actual controllers and actual beneficiaries) and conducting due diligence on shareholders’ sources of wealth, companies’ specific businesses, and trading countries.

Some banks have been punished by local government supervision departments for insufficient due diligence. In 2013, for example, due to ineffective supervision of money laundering activities, some drug trafficking groups were caught laundering money via Hong Kong and Shanghai Banking Corporation (HSBC). The federal court in the United States finally decided to fine HSBC 1.9 billion US dollars. It became the largest fine on a single bank ever in the history of American banks. Besides the fine, HSBC also signed a Deferred Prosecution Agreement (DPA) with the US regulator. Enterprises which sign this agreement have to abide by a number of conditions besides paying fines. As part of this agreement, HSBC also needed to limit the bonuses for its senior executives to comply with relevant regulations. Additionally, HSBC was put under court supervision for as long as five years. (HSBC has already passed the five-year court supervision period.)

Based on the comprehensive review of policies of financial institutions that offer offshore company banking services in mainland China and Hong Kong in 2018, banks have tended to further tighten their account-opening policies for offshore companies and impose more requirements on customer qualification. Additionally, certain banks have also removed some existing customers through account reviewing procedures. Such circumstances have made a certain impact on the normal operation of both newly established and existing offshore companies.

IV What Do Offshore Companies Need to Pay Attention to When Opening and Maintaining a Bank Account?

According to CRS tax-related information, automatic exchange standards, and requirements on financial accounts, citizens need to truthfully declare their national resident tax number when opening a bank account in an overseas country or region. A citizen of mainland China, for example, has to present his or her ID card number.

If an offshore company wants to open a bank account, the bank will conduct due diligence (KYC) on it. On the customers’ side, they need to allow the bank to fully understand their background and business operations, in order to enable the account-opening manager to complete and submit an account-opening report to the examination and approval department, based on their company data. They may also need to provide explanations and supplementary information in time if the examination and approval staff have any questions.

For customers who already have a certain business scale and foundation, besides basic company data and personal data, they are also required to provide sufficient business data to enable the bank to understand their business operations. For example, if an offshore company established by directors and shareholders from mainland China chooses to open an account in a Hong Kong bank, besides basic company data, it also needs to provide sufficient data about its affiliated companies to prove its business background to the bank. The information that may need to be provided can include business licenses, account statements, auditor’s reports, upstream and downstream contracts, value added tax invoices, and freight bills or confirmed orders. To open an account in Hong Kong with a company incorporated in the BVI or the Marshall Islands instead of a Hong Kong company, the customer needs to be prepared to answer questions about why they chose to establish a company in this jurisdiction and still open a bank account in Hong Kong. For most customers, the foremost reason to establish a company in these jurisdictions is tax exemptions. However, this reason is not sufficient enough to persuade the banks to permit their applications. Based on our successful experience with referring customers to Hong Kong to open bank accounts, customers need to offer the bank a sufficient explanation based on their actual situations. For example, a customer chose to use a BVI company to apply for account opening services in HSBC Hong Kong mainly because the BVI company is convenient for managing directors and features low maintenance costs. In addition, if a BVI company doesn’t have an actual business in Hong Kong, it doesn’t need to apply for a business registration certificate (tax code) in Hong Kong for the time being. Through reasonable explanations, the company can pass any further examination and will be granted approval from HSBC.

In the event that a newly established enterprise chooses to use an offshore company to open a bank account, because it has no affiliated companies or other data to support its business background, banks may be stricter with KYC reviews. Such customers will need to offer more data regarding their business background as required by the banks where they’re applying for accounts. For example, a customer who has just resigned from a company and chooses to establish an Internet advertisement company in Hong Kong for future expansion to the overseas market. How can he or she make the bank adequately understand their business operations and procedures? This customer can provide the bank with his or her biographical information, service website, information about potential customers (upstream and downstream), and other data to deepen the bank’s understanding of their company, which will significantly increase the probability of passing the bank’s account-opening examination.

For companies which have already successfully opened bank accounts, every bank will conduct an account investigation and due diligence of customers on an annual or sporadic basis. Each year, a great number of customers’ accounts are closed by banks because the customers don’t realize the importance of their bank’s account investigation and fail to cooperate. This enables the banks to discover any problems with operations or other discrepancies.

What can you do to get through the increasingly tightened offshore banking policies? Firstly, customers should prepare sufficient background information. Then, they may seek assistance from professional consulting teams to improve account-opening efficiency.